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Annex

Excerpt from the Commission Notice "Guidelines on the assessment of horizontal mergers
under the EC Council Regulation on the control of concentrations between undertakings";
Section VII (Official Journal, C 31/03, 05.02.2004).

VII. EFFICIENCIES

Corporate reorganisations in the form of mergers may be in line with the requirements of
dynamic competition and are capable of increasing the competitiveness of industry,
thereby improving the conditions of growth and raising the standard of living in the
Community.102 It is possible that efficiencies brought about by a merger counteract the
effects on competition and in particular the potential harm to consumers that it might
otherwise have103. In order to assess whether a merger would significantly impede
effective competition, in particular through the creation or the strengthening of a
dominant position, within the meaning of Article 2(2) and (3) of the Merger Regulation,
the Commission performs an overall competitive appraisal of the merger. In making this
appraisal, the Commission takes into account the factors mentioned in Article 2(1),
including the development of technical and economic progress provided that it is to the
consumers' advantage and does not form an obstacle to competition.104

The Commission considers any substantiated efficiency claim in the overall assessment
of the merger. It may decide that, as a consequence of the efficiencies that the merger
brings about, there are no grounds for declaring the merger incompatible with the
common market pursuant to Article 2(3) of the Merger Regulation. This will be the case
when the Commission is in a position to conclude on the basis of sufficient evidence that
the efficiencies generated by the merger are likely to enhance the ability and incentive of
the merged entity to act pro-competitively for the benefit of consumers, thereby
counteracting the adverse effects on competition which the merger might otherwise have.

For the Commission to take account of efficiency claims in its assessment of the merger
and be in a position to reach the conclusion that as a consequence of efficiencies, there
are no grounds for declaring the merger to be incompatible with the common market, the
efficiencies have to benefit consumers, be merger-specific and be verifiable. These
conditions are cumulative.

Benefit to consumers

The relevant benchmark in assessing efficiency claims is that consumers105 will not be
worse off as a result of the merger. For that purpose, efficiencies should be substantial
and timely, and should, in principle, benefit consumers in those relevant markets where it
is otherwise likely that competition concerns would occur.

Mergers may bring about various types of efficiency gains that can lead to lower prices or
other benefits to consumers. For example, cost savings in production or distribution may
give the merged entity the ability and incentive to charge lower prices following the
merger. In line with the need to ascertain whether efficiencies will lead to a net benefit to
consumers, cost efficiencies that lead to reductions in variable or marginal costs106 are
more likely to be relevant to the assessment of efficiencies than reductions in fixed costs;
the former are, in principle, more likely to result in lower prices for consumers108. Cost
reductions, which merely result from anti-competitive reductions in output, cannot be
considered as efficiencies benefiting consumers.

Consumers may also benefit from new or improved products or services, for instance
resulting from efficiency gains in the sphere of R&D and innovation. A joint venture
company set up in order to develop a new product may bring about the type of
efficiencies that the Commission can take into account.

In the context of co-ordinated effects, efficiencies may increase the merged entity's
incentive to increase production and reduce prices, and thereby reduce its incentive to
coordinate its market behaviour with other firms in the market. Efficiencies may
therefore lead to a lower risk of co-ordinated effects in the relevant market.

In general, the later the efficiencies are expected to materialise in the future, the less
weight the Commission can assign to them . This implies that, in order to be considered
as a counteracting factor, the efficiencies must be timely.

The incentive on the part of the merged entity to pass efficiency gains on to consumers is
often related to the existence of competitive pressure from the remaining firms in the
market and from potential entry. The greater the possible negative effects on competition,
the more the Commission has to be sure that the claimed efficiencies are substantial,
likely to be realised, and to be passed on, to a sufficient degree, to the consumer. It is
highly unlikely that a merger leading to a market position approaching that of a
monopoly, or leading to a similar level of market power, can be declared compatible with
the common market on the ground that efficiency gains would be sufficient to counteract
its potential anti-competitive effects.

Merger specificity

Efficiencies are relevant to the competitive assessment when they are a direct
consequence of the notified merger and cannot be achieved to a similar extent by less
anticompetitive alternatives. In these circumstances, the efficiencies are deemed to be
caused by the merger and thus, merger-specific108. It is for the merging parties to provide
in due time all the relevant information necessary to demonstrate that there are no less
anti-competitive, realistic and attainable alternatives of a non-concentrative nature (e.g. a
licensing agreement, or a cooperative joint venture) or of a concentrative nature (e.g. a
concentrative joint venture, or a differently structured merger) than the notified merger
which preserve the claimed efficiencies. The Commission only considers alternatives that
are reasonably practical in the business situation faced by the merging parties having
regard to established business practices in the industry concerned.

Verifiability

Efficiencies have to be verifiable such that the Commission can be reasonably certain that
the efficiencies are likely to materialise, and be substantial enough to counteract a
merger's potential harm to consumers. The more precise and convincing the efficiency
claims are, the better the Commission can evaluate the claims. Where reasonably
possible, efficiencies and the resulting benefit to consumers should therefore be
quantified. When the necessary data are not available to allow for a precise quantitative
analysis, it must be possible to foresee a clearly identifiable positive impact on
consumers, not a marginal one. In general, the longer the start of the efficiencies is
projected into the future, the less probability the Commission may be able to assign to the
efficiencies actually being brought about.

Most of the information, allowing the Commission to assess whether the merger will
bring about the sort of efficiencies that would enable it to clear a merger, is solely in the
possession of the merging parties. It is, therefore, incumbent upon the notifying parties to
provide in due time all the relevant information necessary to demonstrate that the claimed
efficiencies are merger-specific and likely to be realised. Similarly, it is for the notifying
parties to show to what extent the efficiencies are likely to counteract any adverse effects
on competition that might otherwise result from the merger, and therefore benefit
consumers.

Evidence relevant to the assessment of efficiency claims includes, in particular, internal
documents that were used by the management to decide on the merger, statements from
the management to the owners and financial markets about the expected efficiencies,
historical examples of efficiencies and consumer benefit, and pre-merger external experts'
studies on the type and size of efficiency gains, and on the extent to which consumers are
likely to benefit.

FOOTNOTES

102 See Recital 4 of the Merger Regulation.

103 See Recital 29 of the Merger Regulation.

104 Cf. Article 2(1)(b) of the Merger Regulation.

105 Pursuant to Article 2(1)(b), the concept of "consumers" encompasses intermediate and ultimate
consumers, i.e. users of the products covered by the merger. In other words, consumers within the
meaning of this provision include the customers, potential and/or actual, of the parties to the merger.

106 Variable costs should be viewed as those costs that vary with the level of production or sales over the
relevant time period. Marginal costs are those costs associated with expanding production or sales at the
margin.

107 Generally, fixed cost savings are not given such weight as the relationship between fixed costs and
consumer prices is normally less direct, at least in the short run.

108 In line with the general principle set out in paragraph 9 of this Notice.